How to Read a Proforma

A proforma provides a detailed financial projection of a property’s potential performance, helping you make informed investment decisions and evaluate real estate opportunities. Find out what you can learn from a proforma, and how to read it effectively.

Proforma Sections: 

Income Projections

This section details the expected revenue from the property, including rental income, parking fees and any other sources of income. Projections should be based on current market rates and recent historical data for similar properties in the area. Verify the income assumptions by comparing them with local market data and consulting with local experts.

Vacancy and Credit Loss

Vacancy and credit loss account for potential income losses – due to unoccupied units or tenants failing to pay rent – usually expressed as a percentage of the total income. Conservative estimates are recommended to provide a realistic view of your potential cash flow, so use average vacancy rates for similar properties in the area.

Operating Expenses

Operating expenses include all costs associated with running the property, including property management fees, utilities, maintenance, insurance and property taxes. A clear view of these expenses is essential to understanding the overall finances. Break down operating expenses into fixed and variable costs to better understand how they may change over time.

Net Operating Income (NOI)

NOI is calculated by subtracting operating expenses from the total income. It indicates the property’s profitability before financing and tax considerations. It is a key indicator of a property’s financial health and potential return on investment. 

After assessing the information, find opportunities to improve your NOI through cost-effective management and maximizing rental income.

Debt Service

Debt service is the total of the payments for property loans, including both principal and interest. It significantly affects cash flow. Analyzing debt service helps gauge how loan payments impact the overall financial health and sustainability of an investment property. Understanding this is crucial for evaluating whether or not a property can cover its debts and still generate positive cash flow.

Check the debt service coverage ratio (DSCR), a key metric for evaluating a property’s ability to meet its debt obligations. It compares the NOI to the total debt service. For example, a DSCR of 1.5 would mean that the property produces 1.5 times the income needed to pay its loans. This number indicates whether a property is expected to manage its financing costs comfortably.

Cash Flow Before Taxes (CFBT)

This figure is calculated by subtracting debt service from NOI. It represents the cash generated by the property before accounting for taxes. A positive cash flow is essential for sustaining the investment and generating returns. Make sure the cash flow is sufficient to cover unexpected expenses and provide a financial buffer.

What’s the difference between the DSCR and CFBT?

DSCR provides a relative measure of the property’s ability to cover its debt, while CFBT shows the actual cash available after covering expenses and debt service.

Capitalization Rate (Cap Rate)

Cap rate measures the property’s return on investment, calculated by dividing NOI by the purchase price. This helps compare the profitability of different investment opportunities, so you can benchmark the property against similar investments.

Internal Rate of Return (IRR)

IRR calculates the expected annualized rate of return on the investment, considering both the property’s income and its eventual sale. It provides a comprehensive view of the investment’s potential performance over time and its long-term profitability.

Guidance and Advice

The guidance of experienced professionals can make all the difference in real estate investing. RLP InvestorsEdge™ is a platform designed by Royal LePage® to support Canadian residential real estate investors. Agents receive exclusive and in-depth Masterclass Series training by Broker’s Playbook™, so they have the tools and insights needed to deliver detailed analysis and personalized advice.